Don’t Blame the Suppliers

OWOE Staff: The energy world has been rocked by a number of crucial events during the past two months. In the transition to renewable energy and more particularly in the removal of fossil fuels form the energy mix, there are possibly three history-making game changers: Don’t get me wrong – I have nothing against environmental activists who are trying to save our planet. In principle, I support most of the stated goals of these individuals and organizations, and of all the people I greatly admire, Greta Thunberg could well be at the top of my list. But the recent focus of these activists on shutting down big oil, closing nuclear power plants, blocking new pipelines, banning plastic straws, etc., is misguided. Yes, all of these are contributors to global warming and other forms of pollution, and yes, the world would be better off without all of them. However, the problem is that these things represent the supply side of the economic marketplace. They are there because people want them, either directly – we want gas to drive our cars, or indirectly – we want to buy lots and lots of stuff that takes energy to manufacture and transport. Cutting supply does not solve the problem if the demand remains: cleverer or less scrupulous players will gladly jump in to fill the void. And, at the end of the day, all of us will likely be worse off.

We are seeing many examples of how supply side restriction in the world of energy lead to very negative unintended consequences (See OWOE Blog: The Cobra Effect). US oil production fell during the pandemic as shale oil producers cut back operations or went bankrupt. Now that the economy is roaring back, there isn’t enough supply, and prices are rising. The result: President Biden has asked OPEC to supply more oil. So, instead of paying US companies to produce the oil that people want and still need, we are sending our money to Saudi Arabia.

Germany had been proceeding with its plans to shut down all nuclear plants, but without a well-thought-out path on how to replace all that green power. Further, Germany supported Russia’s plans to build the Nordstream pipeline to bring gas to Europe. With energy demand rising and lack of domestic supply, the result is that Germany and Europe are now held hostage by Russia.

Recently, a report has been released that ranks Canada as one of the worst emitters on the planet on a per capita basis. How can that be for a country that get about 30% of its energy needs from hydropower? The answer is that Canada’s carbon footprint is not driven by internal energy needs, but by emissions associated with the extraction and refining of fossil fuels for export. I would advocate that a country shouldn’t be penalized for what it provides to other countries. If Canada shuts down, the importing countries will just get what they want from somewhere else, the planet is no better off, and wealth has left Canada for OPEC or Russia (as predicted in the OWOE blog: Time for a New Energy Policy).

We can look at non-energy for guidance in how not to solve a public health problem. In the 1920’s the US experimented with prohibition to eliminate alcohol use. It prohibited manufacture, transport and sales of alcohol, but people were intent on drinking and found ways to get around the law. Result: it was a failure and prohibition ended in 1933. In 1971 President Nixon started the War on Drugs, and it is estimated that over the course of 50 years the US has spent over $1 trillion on the effort with no fundamental impact except the incarceration of tens of millions of American. By all measures: another major failure. In contrast, we can turn to cigarette smoking as an example of an effective campaign to address a public health issue. In the 1960s medical health professionals realized that smoking was a serious issue and began a broad public health campaign to eliminate smoking. It focused on changing people’s perception of the habit and behavior (i.e., the demand side of the equation) along with a focused and aggressive regulatory regime that dramatically raised the cost of smoking (also demand focused). Figure 1 shows the impact over a similar 50-year period to the War on Drugs.

Why can’t the same tactics be used successfully to reduce greenhouse gas emissions? Let’s make a major push on the demand side of the equation: implement a significant carbon tax and other taxes that reward the right behavior, focus on energy efficiency, invest in renewable energy, rein in the utilities so that their financial objectives align with world needs, regulate the oil and gas industry to eliminate fugitive methane emissions, stop the political bickering that is driven by individuals and organizations that choose to ignore the science of climate change for personal benefit, and create a public service campaign that helps all Americans understand the benefits of such plans.

And then let the suppliers battle on an even playing ground for the remaining, and ever shrinking, market.

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